Resolving Claim Disputes: Step 0

Resolving claim disputes involves a four-step process of reading, researching, documenting, and pleading your coverage position. This process evolved from a series of seminars I introduced in the ’90s. However, when I sat down to write the book on which this series of columns is based, I realized there is a step that precedes them all – what I refer to as Step 0.

Step 0 bridges the two ways to deal with claim disputes — avoidance and resolution — by ensuring that a claim denial is tendered in a manner that meets industry standards of fairness and good faith. No claim denial should go unchallenged that doesn’t meet certain prescribed criteria.

So, in this month’s column, we’re going to focus on statutory and regulatory standards for claims handling. Specifically, we’ll examine claim declination and reservation of rights letters and unfair claim settlement practices and bad faith laws.

In the companion webinar from the Academy of Insurance, we’ll dig even deeper with numerous examples of declinations.

In my book, “When Words Collide: Resolving Insurance Coverage and Claims Disputes,” I cite an excerpt from a 1983 insurance company claims manual which said, “[There is a] requirement to meet the duty of good faith to the insured. The most positive way to do that is to look for coverage in our policies, and not to look for ways to deny coverage.”

We are an industry founded on uberrimae fidei, the duty of utmost good faith. I believe that most insurers, culturally and procedurally, strive to abide by that philosophy.

There is some evidence of this in the paucity of successful bad faith lawsuits. For example, according to attorney Dan Kohane, it has been more than 20 years since a New York appellate court found insurer conduct egregious enough to constitute actionable bad faith.

Admittedly, though, part of the success may be attributable to just how difficult it is to prove bad faith; the legal criteria being more along the lines of “beyond a reasonable doubt” criminal law standards than the “preponderance of the evidence” civil law standards applied to coverage determinations.

Even so, I suspect that most successful bad faith litigation involves localized “bad apples” rather than anything systemic.

However, unfair claim settlement practices are another matter. My experience is that too many claim denials do not comply with statutory or regulatory unfair claim settlement practices.

I don’t think this is typically due to any maliciousness or disregard for the law, but rather most often results from inadequate training or oversight, or simply shortcuts believed to be necessitated by excessive workloads.

Unfair Claim Settlement Practices Laws

To the best of my knowledge, every state has an unfair claim settlement practices law, all but a half dozen or so based largely on the model law of the National Association of Insurance Commissioners (NAIC). Some states elaborate on NAIC criteria by being more detailed and/or stringent. For example, the California Code of Regulations, Title 10, Chapter 5 says:

“Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given such rejection or denial which is then within the insurer’s knowledge.

“Where an insurer’s denial of a first party claim, in whole or in part, is based on a specific statute, applicable law or policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the statute, applicable law or provision, condition or exclusion to the claim.

“Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing….”

Based on the wording and intent of such laws, there are certain criteria all claim declination and reservation of rights letters should and should not include.

All Declinations SHOULD…

The first rule in the claim resolution process is to never accept an oral declination of coverage. Oral declinations are not only a bad idea, they’re likely unlawful. All claim declinations should meet at least three criteria:

  1. Be in writing. This means more than a letter that says, “You have no coverage for this loss” (quoted from an actual letter). That is no more acceptable than an oral declination.
  2. Cite the specific policy language (and only that language) that is applicable to the present denial. One exception would be, if a reservation of rights is included (quite likely), additional policy language that may be cited. However, as discussed below, the letter should not include a laundry list of policy language excerpts that border on copying and pasting the entire insurance contract. The validity of a claim denial is not based on the volume of words used nor their obfuscatory weight.
  3. Explain why and how that policy language works to exclude coverage. It is not enough, for example, to simply list one or more exclusions and leave it up to the policyholder to figure out why such exclusions apply to the loss. To fulfill its obligations under the contract, especially as the sole drafter of the form language, the insurer is compelled to explain how the language applies to preclude coverage.

In my experience, the third criterion is the one most often deficient in a claim denial, though I’m seeing an increase in the second one.

All Claim Declinations Should NOT…

There are also at least three practices that should not be evidenced in a claim denial or reservation of rights letter, each of them related to the second criterion just discussed. Policy language citations should NOT:

  1. Generalize or paraphrase policy language. Only the exact language from the insurance contract should be the basis for the denial. The declination letter should not include only a summary or paraphrasing of the referenced policy language nor, as I have seen on a number of occasions, should this generalization be presented in quotation marks as if it is actual contract language.
  2. Include policy language excerpts that misrepresent the intent of the language. In one coverage (not claim) dispute, an underwriter was asked if a condo unit owner’s homeowners policy covered his use of the condo clubhouse rented for a birthday party. The underwriter responded that there was no coverage because of an exclusion for liability “Arising out of a premises: (2) rented to an ‘insured’….” The problem was, the policy language actually said, “Arising out of a premises: (2) rented to an ‘insured’; that is not an ‘insured’ location.” The clubhouse WAS an “insured location,” but this highlighted language was left out of the coverage opinion.
  3. Essentially consist of copying and pasting most of the exclusions in a policy regardless of relevance to the claim in question. I see this frequently. Most recently, an insured returned home from work to discover that her home was flooded due to a burst water pipe fitting. The adjuster initially denied the claim, citing an exclusion for “Constant or repeated seepage or leakage of water over a period of weeks, months, or years.” Aside from the fact that this exclusion was not relevant to the facts of this claim, the adjuster went on to cite a litany of other exclusions in the policy ranging from agricultural smudging to birds, vermin, rodents, and insects, none of which even remotely applied to the claim.

Again, in the companion webinar series, I’ll explore a number of examples of actual claims where denials were likely not in regulatory compliance in order to illustrate what to look for to ensure that such denials meet legal and ethical duties to policyholders. We will also effective reservation of rights letters.

Next Steps

We’re now halfway through this 2019 series. In the remaining six installments, we will delve into the details of exactly how a claim can be equitably resolved. That involves addressing some policy interpretation basics, at least a dozen legal and contractual doctrines, and up to 17 dispute resolution principles.

We’ll conclude the series with tips on how to plead your case if the ‘scales of justice’ are tipped in your favor as a result of your research and documentation.

In the meantime, if you are not a member of the Academy of Insurance, I recommend that you consider becoming one. Not only will it give you access to the complete series of companion webinars for this column, but also scores of other educational programs. It’s one of the best educational deals in the industry.